Using Your IRA to Purchase Real Estate
Many investors today are questioning the integrity and fairness of many of our publicly traded companies. As a result, they are increasingly looking at that old reliable of smart investing- real estate. Think about it. Wouldn't it be nice to have a family vacation home or condo to enjoy with the children and grandchildren now and in the future? Or perhaps a rental or commercial property to supplement retirement income?
According the Investment Company Institute Research, there are approximately two trillion dollars invested in IRAs. Baby boomers and other wealthy people own a large portion of this money. Some people have large estates and other assets to live on, and they will end up passing their IRAs to their family members down the road. These people have not considered that their family could pay as much as 68 cents on each dollar they inherit. This taxation comes in two forms, estate taxes and income taxes.
Many IRA and IRA rollover holders have not been told and therefore do not know how to use their IRA and IRA rollover monies to purchase real estate. The IRA real estate purchase can be done in two very different ways.
The first way is for the real estate to be owned by the IRA. This requires moving your IRA to a self directed IRA custodian that allows real estate. The custodian will be the owner of the real estate. Since the real estate is inside the IRA, the real estate comes under restrictive IRA rules and law. All proceeds must go back into the IRA. You cannot use your IRA to purchase your own residence, condo or any property in which you or your family live or work.
In addition, if the real estate is a rental property the custodian will require the investor to appoint a property manager. Also, the IRA owner must comply with minimum and mandatory distributions, non-compliance penalties, transferability and/or taxes. Most people are not aware, that when distributions are taken from an IRA, the distributions can be taxed at the owner's highest marginal income tax rate.
The second way real estate can be purchased is outside an IRA and owned outright. The IRA funds the real estate purchase and the owner can now take advantage of advantage of a full range of the financial and economic benefits real estate offers. Occupancy is now possible. Capital gains tax treatment, depreciation, additional write-offs, rental income flexibility, a stepped-up income tax basis and the personal residence exclusion become possibilities. Leverage is now a financial option for the real estate investor.
The IRA can completely or partially fund a real estate purchase. You can even share ownership with others. You can buy a commercial building, land, a second home, a condominium, an office building, a rental property, a ranch etc. If you are leasing a building, you could purchase your own office and recover your lease payments
Both methods of using your IRA and IRA rollovers to purchase real estate have been around for many years and should be understood before deciding which is right for you.
For more information, contact Nick Herak at www.herakfinancial.com
Editor's Note: This article is for informational purposes only. Readers are advised to discuss this information with their legal and/or tax advisor in order to gain more knowledge on this topic.